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10/20/2013

Equality of Opportunity-Posner

Income inequality in the United States has grown substantially since the 1970s, to the point where today the bottom 20 percent of the nation’s households have 5 percent of total income, the top 10 percent about 50 percent, and the top 1 percent more than 20 percent. The question is whether such a high level of inequality is likely to reduce what is called “relative mobility,” or the likelihood that members of one generation of a family and members of the next generation will end up at different points in the income distribution. You are very likely to earn more than your father; the question is how likely are you to be higher (or lower) in the income distribution. If he is in the bottom quartile, for example, how likely are you to be in the next higher quartile?

Income inequality in the parents’ generation might be expected only to create income inequality in the next generation. Whether income inequality will affect relative mobility will depend on why income inequality in the current population is so high. One possibility is that, because of increased assortative mating as a result of declining discrimination and of the efficiency of online search for potential mates, there are greater differences in IQ across families than there used to be. Another possibility—closer to a certainty—is that as a result of automation in the broadest sense, the economic returns to IQ have risen relative to the returns to strength and stamina, which are the qualities important to such vocations as factory work, construction, mining, and farming.

The combination of assortative mating with higher returns to IQ could have dramatic effects on relative mobility if the effect was to insulate to a significant degree a prosperous family’s children from economic risk. And it may be. The adults in high-IQ families are disproportionately represented in the jobs (professional, managerial, financial, and so forth) that pay well, and their income can and often is used to give their children a boost—for example in the form of payment of tuition to high-quality (and very expensive) private schools, payment to tutors, a variety of other educational enrichments, and entry into high-quality colleges without need for their children to borrow to finance college (or graduate or professional school) and thus assume debt. Colleges like to admit kids from high-income families, seeing such kids as future donors. And high-IQ parents are likely to produce high-IQ children, further enhancing the children’s attractiveness to first-rate colleges. These factors, which loom larger the greater the inequality in the income distribution, because that inequality creates a highly affluent tier of families (a proximed by the income shares of the top 10 percent and within that group the top 1 percent) are likely to reduce relative mobility, by securing a disproportionate number of the top college and university admissions and top jobs for children of the intellectual-economic elite.

These factors can be offset to a significant extent by immigration, because immigrants tend to be more ambitious, bold, and determined than the average member of their nation of origin; refugee immigrants are often drawn from the elite of their nation of origin. First-generation immigrants tend not to have a high income, but to endow their children with the attitudes and abilities that enable the children to achieve economic success. Certainly the United States has benefited greatly in recentyears from immigration from countries like China, India, and South Korea. But relative mobility that is the consequence of the artificially depressed income of first-generation immigrant families does nothing to promote relative mobility for the children of low-income native-born Americans.

A 2011 study by Scott Winship for the Brookings Institution reports that the likelihood that an American will rank higher in the income distribution than his parents is lower than in most other wealthy countries. The report states: “If being raised in the bottom fifth [of the income distribution] were not a disadvantage and socioeconomic outcomes were random, we would expect to see 20 percent of Americans who started in the bottom fifth remain there as adults, while 20 percent would end up in each of the other fifths. Instead, about 40 percent are unable to escape the bottom fifth. This trend holds true for other measures of mobility: About 40 percent of men will end up in low-skill work if their fathers had similar jobs, and about 40 percent will end up in the bottom fifth of family wealth (as opposed to income) if that’s where their parents were.” Income inequality is greater in the United States than in our peer countries, and may be responsible for our lower relative mobility. In the limit, an income distribution that produces a very wealthy top tier of earners and a very large bottom tier of poor or low-income families may reduce movement between the tiers in subsequent generations.

Becker points to Headstart and other government programs as possible counters to the effect of income inequality on economic opportunities for children of families that are rank low in the income distribution. This raises the question whether there may be a more efficient way of dealing with the problem of relative mobility than spending government money. A natural starting point would be to increase the very low federal income tax rate (15 percent) on dividends and capital gains, which is a significant factor in the increase in income inequality.

Comments

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As for the Winship study, I would expect a random but Gaussian distribution (not unlike IQ). Very few individuals are going to have the wherewithal to jump from the bottom all the way to the top, certainly not 20%.

What you have/achieve/acquire/accomplish in your life is a function of two variables: (1) what you are given, and (2) what you work for. You may have brains, wealth, access to education, and other benefits without having to lift a finger, and you can improve on that initial position by your efforts. Those born into the 0-20 bracket are given the least, and have to work the hardest to compensate if they want to move up. How far they move up is largely a function of effort, and part of their plight is that the gift of an exemplar of the work ethic may be what they have missed the most.

For 99% of people, the second factor is far more determinative than the first. Just as archers know that their craft is better facilitated by a cheap bow and high-quality arrows than vice versa, a person of average intelligence who works hard will almost always outdistance a gifted, lazy person (such as I). Gifted-and-driven is an unbeatable combination; those people will always do fine, and are not part of the topic.

That leaves those who start so low on the ladder that it's an accomplishment just to climb above the poverty level in one generation. If 40% of the bottom fifth are still there a generation later, that means that 60% - more than half - climbed out, and I find that a fantastic statement of achievement and a testament to the obvious possibility of mobility within our societal structure. It also means downward mobility is a real possibility, as it should be. We know where a chunk of the bottom fifth came from - they were born there. Where did the rest come from? Some perhaps immigrated, but most fell, and that is as encouraging a sign as the rise of others, for it speaks to the meritocratic fairness of this life we live in America. There are no goldon boys. Everyone is subject to the rules, eventually.

Maybe there is more than a lifetime's worth of achievement in the differential between out top 20% and bottom 20%; it will be a rare individual indeed who can leap that entire span in a single bound. I don't see that as a problem at all. It simply means very great rewards, far beyond mere daily bread, are available to those who care to apply themselves seeking same. Of the 40% who can't even jump from 0-20 to 20-40, they include substance abusers, mental patients, and immigrants with zero language skills and zero interest in learning English because they can function just fine in the underground economies of their little Havanas and little Beijings. Not everybody even cares to jump up. Some are blissfully unaware of the higher 80%, or specifically unattracted to it. I thus do not think the 40% is a problematic figure at all. If nobody stayed in 0-20, I would suspect a communist distortion in the system.

I'm in favor of a floor, or to quote Joe Biden quoting Noel Kinnock, "a platform on which to stand". I just don't think it is important or even appropriate to make that platform particularly high. Some children would prefer to be left behind, and I don't judge their choices.

In this post Judge Posner continues the pursuit of one of the more interesting themes he has opened up, one that is very reminiscent of some ideas that the psychologist Richard Herrnstein was developing near his death. If IQ is one of the principal drivers of economic success (as seems likely), and IQ is largely heritable (which also seems to be the case), with the remaining portion of IQ contributed by family structures more or less guaranteed by assortative mating (also plausible), are we not drifting toward a social hierarchy which, unlike the French aristocracy of the 18th century, is based upon real merit?

But this would be a "natural aristocracy" very different from the one hoped for by Jefferson. Rather than arising from talents in every class, developed by education, it would be more like the social class satirized by Michael Young in "The Rise of the Meritocracy," or demonized by Alistair Huxley in "Brave New World."

As one of the "deltas," I am not sure what to make of this prediction. Like any aristocracy, I would expect this new one, if it develops, to seek to preserve its advantages in various legal and institutional ways. Unlike Posner, I do not see how the tax code could be manipulated to mitigate this, or whence the incentive to attempt it could arise.

I don't think it's likely that increasing taxes on dividends and capital gains will help, because such a law will only have the effect of decreasing the incentives for companies to increase dividends and for individuals to realize gains. The former will devote their money to share buybacks, which are an untaxed and untaxable method of returning money to existing owners, and the latter to buying fewer, better companies that they have no interest in selling, or to buying companies whole at a time when more and more companies are going private and more are becoming partnerships which avoid double taxation. Warren Buffett's success has been in no small part due to avoiding taxation by these methods.

As for the other side of the coin (so to speak)-- the effectiveness of increased funding in increasing actual earnings of the poor-- I am not convinced that it is or can be made noticeably higher. There are only so many elite jobs to go around, after all, and the children of the rich aren't going to take their loss lying down.

I can remember one young student I had during my student teaching days. This was a young minority kid who tested out in the "Genius" category in Mathematics and when asked about his background and what he'd like to do, his response was, "My Father? I've never met him. My Mother? "All she's interested in is her next fix an selling her butt. What do I need to learn all this stuff for? I can steal what I need and for money I can sell dope". This kid went on to become one of the "Bookkeepers" for the area Drug Lords and was later killed in a Gang fight over area distribution control. So much for being "Gifted". The economic realities of many of the underpriviliged preclude any form of "Equality of Oppurtunity".

As for the Middle and Upper Classes, there is the old economic saw, "Shirt Sleeves to Shirt Sleeves in three generations". Even with their social and educational oppurtunities. The Statistical Analyses just don't seem to take any of these realities into account. And so, things continue along as they always have; the the issues of "equality or inequality" getting stranger and stranger...

Judge Posner,
I believe that you are overlooking some of the obvious. I will speak to two of them. (1) The concept of "SPAN OF CONTROL" i.e. how many people a supervisor can oversee. Tom Peters describes a greater span of control taking place in the workplace. A manager supervising more (equivalent) workers would tend to be better compensated than one supervising fewer. Magnify that with the larger and larger corporations with a CEO having hundreds of thousands of employees. (2) What is the average family size of the lower quintile versus the upper quintile? Percolate the family size through the filter of parental education (valuation of education) and the result of points (1) and (2) result in a much greater number of lower educated workers. The answer would be to lower the dividend/cap gains rate for lower incomes to zero to further encourage them. But the drivers of dividend and cap gains availability are those in the higher income (top quintile) so the rates for the top 20% must be kept within a range to encourage that cohort to continue.

I'd explain the difference between the US and Europe as that the US is more meritocratic, and hence more unequal. Suppose we start from a situation in which connections count for 100% and ability counts for 0%. Inequality will be the same the next generation. If we move to a situation with connections and ability each counting for 50%, many low-ability people will start with connections and do well, but many high-ability people will start without connections and do well, so inequality will decrease. Now move to a situation with 0% effect of connections and 100% effect of ability. The low-ability now have no chance. After one generation, there are no low-ability people with high income. After that, the degree of inequality, already high, freezes. Ability is the only factor, and if high-ability parent have high-ability children on average (and inheritance of wealth is a minor factor), inequality is high.

If inheritance counts for a lot, because of low inheritance taxes, that will maintain income equality for while--- there will be stupid trust-fund children who will nonetheless be rich. But if we have high estate taxes, even this advantage of the low-ability people will vanish.

Is this result of high inequality due to merit being rewarded good? It depends on your point of view. If equality is good in itself, it is a bad result. You don't want to reward merit: you want as much randomness as possible.

Inequality is linked to the way we are taxed. The special breaks and deduction that make up Americas tax code are massively confusing. Most people are totally ignorant of tax law and have no idea what they are talking about when they express an opinion on what policy changes should be made,or how they will effect the economy. In 2003, President Bush proposed to eliminate the U.S. dividend tax saying that "double taxation is bad for our economy and falls especially hard on retired people", this is questionable. He also argued that while "it's fair to tax a company's profits, it's not fair to double-tax by taxing the shareholder on the same profits." This formed the bases for the following tax table that can be found on my blog with a post on this subject;

It is important to note that what happens to the tax rate on dividends and capital gains will have more effect on "high income earners" that receive this type of income then the tax rates on their earned income that is often the center of political debate.